I’m still not a fan of international bond funds

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Re: I’m still not a fan of international bond funds

Post by bobcat2 » Sat Apr 21, 2018 2:11 pm

I'm quoting from the first edition of All About Asset Allocation page 149. Check it at Amazon.

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Re: I’m still not a fan of international bond funds

Post by Earl Lemongrab » Sat Apr 21, 2018 2:13 pm

lack_ey wrote:
Sat Apr 21, 2018 2:07 pm
Earl Lemongrab wrote:
Sat Apr 21, 2018 2:05 pm

Your quote doesn't show any EE bonds. Looks like you flubbed the copy/paste.
Looks like it's edited now to include EM
Based on the edit timestamp, he picked up the error while I working on the post. It happens.
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Re: I’m still not a fan of international bond funds

Post by lack_ey » Sat Apr 21, 2018 2:21 pm

Okay, if that truly changed between the editions then that's interesting, especially if Rick himself doesn't remember the old recommendation. The second edition of the book is already eight years old by this point... I guess that's an "oops" on the "never"?

That said, "international bond funds" in the context of this thread does seem to be referring to those with non-USD bonds. You can find plenty of EM bond funds that use only USD issues. EM USD bonds is more of a credit play on a little bit of a different dimension than high yield corporate.

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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sat Apr 21, 2018 2:38 pm

It was probably the first edition of the book I wrote about 13 years ago. At the time, I did recommend EM closed-end bond funds because they were selling at deep discount to NAV. Those funds were converting to open-end and there was a unique opportunity for risk-free arbitrage. All of the EM closed end funds I recommended have since converted to open-end and the discounts were turned into realized gains. Sorry for the confusion.

I will add that this post was intended to address hedged investment grade developed market bond funds, i.e. Vanguard Total International Bond Index Fund Investor Shares (ticker: VTIBX) and others. Emerging market bond index funds are a different animal. I have no definitive opinion at this time, although they look somewhat expensive to me given the historic risk of the asset class.

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Last edited by Rick Ferri on Sat Apr 21, 2018 2:43 pm, edited 3 times in total.
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Re: I’m still not a fan of international bond funds

Post by bobcat2 » Sat Apr 21, 2018 2:39 pm

And here's a quote from the Bogleheads Wiki on emerging market bonds.
In the first edition (2006) of author Rick Ferri's book, All About Asset Allocation, the author included emerging market bonds as a potential portion of a widely diversified taxable bond allocation. The author suggested the following allocation:
Table 4. Fixed Income Allocation (Ferri 2006) Fixed Income Allocation Fixed Income Category

Code: Select all

50% 	Lehman Aggregate Bond Index
20% 	Treasury Inflation-Protected Bonds or I bonds
10% 	High Yield Corporate Bonds
10% 	Emerging Market Debt
Link to Wiki page - https://www.bogleheads.org/wiki/Emerging_market_bonds

What I remembered was several heated discussions between Ferri and Swedroe in the past on certain assets in a portfolio. Swedroe thought holding commodities was a good idea. Ferri thought that a bad idea. Ferri thought holding high yield bonds and emerging market bonds were good ideas. Swedroe thought that they were bad ideas. I decided to test my memory and look at Ferri's book AAAA and see if what was in the book squared with my memory or what he was writing in this thread.

There is also this thread from a few years ago.
viewtopic.php?f=1&t=91779&hilit=emerging+market+bonds

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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sat Apr 21, 2018 2:43 pm

What I love about is board is no one gets away with even the tiniest mistake. That's good. It keeps us all honest!

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Re: I’m still not a fan of international bond funds

Post by Good Listener » Sat Apr 21, 2018 2:45 pm

I don't think you will find half a dozen people at this site who are fans of international bond funds.

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Re: I’m still not a fan of international bond funds

Post by NoRoboGuy » Sat Apr 21, 2018 3:20 pm

I maintain my position of not holding any international bonds. On my website I do say that if you are planning to hold international bonds, I can only recommend the Vanguard one. I maintain that view today.
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Re: I’m still not a fan of international bond funds

Post by cfs » Sat Apr 21, 2018 3:38 pm

I don't know of "half half a dozen" members "buying" the international bond fund from Vanguard. When the fund was launched my "prediction" was that this fund would become the number one international bond fund due to the aggressive marketing by part of Vanguard and by the inclusion of this fund in various balanced funds (i.e. life strategy and target retirement series). I know about Vanguard "selling" the fund in their packages, but I don't know about their clients "buying" the individual bond fund (other than in a package). Note, I do not track this fund, so, I don't know if it became the number one international bond fund, or it is close to become numero uno. Good luck with your investments, y gracias por leer ~cfs~
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Re: I’m still not a fan of international bond funds

Post by nedsaid » Sat Apr 21, 2018 4:07 pm

Rick Ferri wrote:
Sat Apr 21, 2018 2:43 pm
What I love about is board is no one gets away with even the tiniest mistake. That's good. It keeps us all honest!

Rick Ferri
I came to Larry Swedroe's defense and now I will come to yours. Not that you need me to defend you.

What I try to tell people is that markets and the economy are dynamic. Somehow people think that a good author should never change anything. Like the first edition of your Asset Allocation book is supposed to be brought down off of Mt. Sinai by Moses. A recommendation that you made 15 years ago might not make sense today and some people just cannot handle that.

I guess poor Larry will have to get 40 lashes for modifying his advice on Collateralized Commodity Futures. Seeing that you seemed more penitent than Larry, I suppose you deserve only a lashing with a wet noodle. :wink: But don't do it again! :wink: We will let you off this time. :wink:

Rick, if either you or Larry were my investment advisor, I would hope that your recommendations would be fine tuned with more knowledge and with changes to the markets and the economy. We live in a dynamic and not a static world.

I guess what I should do is just take my original 10 or 15 posts and just keep reposting them. That way nobody could criticize me for inconsistency. If we all did that, it would be a very dull forum.
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Re: I’m still not a fan of international bond funds

Post by jalbert » Sat Apr 21, 2018 4:24 pm

For example currently I see spot EUR/USD of 1.2288 with a 1-month forward quoted at around 26 (units are 1/10000). So we can convert 1 euro to 1.2288 USD today, or convert 1 euro today to 1.2314 USD in a month. That monthly difference 1.2314 / 1.2288) comes out to an annualized hedge return of 2.57%. Of course the rates will change over time, but if anything USD short rates are rising faster than EUR short rates. Sure, a 10-year German bund is at 0.50% yield in local currency terms, but if we get 2.57% on top of that to hedge the currency back to USD, that looks... more or less reasonable at the moment, in line with a 10-year US Treasury at 2.96%. No huge deal?

edit: if somebody sees a mistake in the above, please let me know.
Yes, the flattening of the US yield curve has actually made hedged int’l bonds competitive with US bonds. The return in the forward contract is the difference between interest rates of the two currencies at that point on the yield curve as you noted.

When the US yield curve was steeper, the spread between yields at the point on the yield curve corresponding to the duration of BNDX (intl bonds) was much greater than the spread for 30-day or 90-day rates so that led to effective yield (yield plus hedge return) of BNDX not being very competitive with treasuries. With a flattened US yield curve, the gap has mostly narrowed.

An interesting detail is that changes in effective yield from a change in hedge return do not effect bond price at the low duration of the forward hedge contracts. Thus a hedged int’l bond fund behaves like a mix of fixed-rate and floating rate instruments. This, in conjunction with the currently very narrow spread between effective yield of US and hedged int’l bonds, would make it a fairly attractive diversifier in the present rate environment.
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Re: I’m still not a fan of international bond funds

Post by asset_chaos » Sat Apr 21, 2018 6:24 pm

nisiprius wrote:
Fri Apr 20, 2018 9:17 pm
I think an interesting question is: how does it benefit Vanguard to offer these funds?
That is a good question. Vanguard is expanding all over the world and wants, I assume, to manage the bond (and stock) portfolios of investors all over the world. I expect this brings expertise and comfort in non-US bond markets. Outside the US Vanguard already for several years has offered total global bond index funds hedged to half a dozen currencies. I suspect that approach could be markedly advantageous to every investor that is not earning and spending in the current global reserve currency---and is possibly neutral even to those that are.

In another thread (viewtopic.php?f=10&t=247091) on a "Vanguard Video Recomm[e]nding World Market Cap Weight", I speculated that since global stock and bond markets are about $90 trillion (FTSE Global All Cap Index plus Citi World Broad Investment-Grade Bond Index) and Vanguard manages some $5 trillion now that maybe they are anticipating the day when Vanguard will effectively be managing a global market weight portfolio, when averaged over all the assets they manage world-wide, and they're softening us up to the idea that the more of us who go with a global market weight portfolio (via target date or lifestrategy type funds), the easier and cheaper it will be to manage the entire portfolio of Vanguard indexed assets.

Pure speculation, of course, but organizations tend to grow or stagnate, and I assume Vanguard management sees benefit in growing their business.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sat Apr 21, 2018 7:12 pm

Here is an excellent new article by Jonathan Clements about non-US investors that fits perfectly with this conversation

Exposing Yourself

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Re: I’m still not a fan of international bond funds

Post by cfs » Sat Apr 21, 2018 8:27 pm

Good article!

Gracias por leer / cfs
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Re: I’m still not a fan of international bond funds

Post by spdoublebass » Sat Apr 21, 2018 10:09 pm

Great thread.
Few questions/comments from a regular Joe Investor.

BNDX (Vanguard int. bond) YTD is .60%, SEC is .81%
BND YTD is -2.43%, SEC is 2.99%

While I'm no fan of international bonds, I gotta say at least it hasn't gone down. Does that count for anything (diversification?) or am I looking at this all wrong? On the other hand, whatever role BNDX could play, there might me a better solution.
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Re: I’m still not a fan of international bond funds

Post by stlutz » Sat Apr 21, 2018 10:29 pm

Rick: First, thanks for starting the thread and sharing your current (unchanged :D ) opinion on the VG fund. Our of curiosity, what would have to happen to make you a fan of the VG international bond fund? Would a higher yield do the trick? Or you would need to become less confident in the "full faith and credit" guarantee of Treasury bonds? Or something else?

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Re: I’m still not a fan of international bond funds

Post by pascalwager » Sat Apr 21, 2018 11:30 pm

cfs wrote:
Sat Apr 21, 2018 8:27 pm
Good article!

Gracias por leer / cfs
+1

I now better understand some basic considerations about global investing, for US and non-US investors.

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Re: I’m still not a fan of international bond funds

Post by pascalwager » Sun Apr 22, 2018 1:54 am

spdoublebass wrote:
Sat Apr 21, 2018 10:09 pm
Great thread.
Few questions/comments from a regular Joe Investor.

BNDX (Vanguard int. bond) YTD is .60%, SEC is .81%
BND YTD is -2.43%, SEC is 2.99%

While I'm no fan of international bonds, I gotta say at least it hasn't gone down. Does that count for anything (diversification?) or am I looking at this all wrong? On the other hand, whatever role BNDX could play, there might me a better solution.
Yes, this is an example of diversification. YTD, TBM has lost and TIB has gained over a period of at least four months. If you were withdrawing in retirement to buy basic necessities, this would be better for your portfolio than if both funds had declined.

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Re: I’m still not a fan of international bond funds

Post by Cantrip » Sun Apr 22, 2018 3:24 am

The current US total market bond (VBTLX) sec yield is 2.99% and the current total international bond (VTABX) sec yield is 0.81%.

If the sec yields were switched, with US at 0.81% and international at 2.99%, would you change your mind? I presume the US fund would have a large gain in price, and the foreign a large loss...

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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sun Apr 22, 2018 6:37 am

As it was pointed out, the SEC yield on a hedge international bond funds is not the expected total return. These funds use futures and swaps to hedge currency risk. The hedging strategy often produces a much different expected total return than yield alone, and that return is not very predictable. I think this is one of the problems with international bond funds. They are complex investments and not well understood. Personally, I’ll do without them.
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Re: I’m still not a fan of international bond funds

Post by Valuethinker » Sun Apr 22, 2018 6:53 am

Cantrip wrote:
Sun Apr 22, 2018 3:24 am
The current US total market bond (VBTLX) sec yield is 2.99% and the current total international bond (VTABX) sec yield is 0.81%.

If the sec yields were switched, with US at 0.81% and international at 2.99%, would you change your mind? I presume the US fund would have a large gain in price, and the foreign a large loss...
Covered Interest Parity pretty much holds.

In other words, my returns are the same if I:

- put money in USD CD for 12 months (or other risk free investment)

- switch my USD into EUR now, invest in a risk free investment in the Eurozone for 12 months, and buy a forward contract to sell EUR for USD at the end of 12 months (thus locking in the exchange rate now)

Thus we can see that the returns of currency hedged overseas bond funds, and US Treasury funds, are going to be pretty close to each other.

Basically any gain we make on yield is the result of credit risk - some countries have riskier bonds than the USA.

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Re: I’m still not a fan of international bond funds

Post by nisiprius » Sun Apr 22, 2018 7:18 am

Personally, I just don't care.

The closest thing I know to a longer "history" for a currency-hedged international bond mutual fund I know would be a PIMCO fund, "PIMCO Global Bond (US Dollar-Hedged) Fund" (blue) with an 0.55% expense ratio. I compared it to Vanguard Total Bond (orange).

Based on, you know, past performance, I can see why people might find it appealing. Unfortunately (?) I have the feeling that PIMCO might have been doing some successful currency speculation in their fund.

Source

Image

According to PortfolioVisualizer, Source, since inception PGBIX has had a Sharpe ratio of 1.04, compared to 0.79 for Total Bond, so the improvement is "real."

By comparison, the PIMCO Global Bond (Unhedged) has only had a Sharpe ratio of 0.54; as expected, currency fluctuations made this a volatile fund that doesn't "look like" an investment-grade bond fund at all.
Last edited by nisiprius on Sun Apr 22, 2018 8:21 am, edited 2 times in total.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sun Apr 22, 2018 7:28 am

As I noted early, several developed country central banks forced their bond yields below zero percent and that lifted total return on bonds in those counties well over US bonds. They’ll be a payback for that in the future. I prefer not to have the added risk in my portfolio.

For the record, at this stage in my life and in my education as an index investor, I’m all about keeping it simple. I’m consolidating accounts, cutting the number of funds to a handful, getting my portfolio to where it needs less maintenance. I understand having an allocation to international bonds *might* provide a diversification benefit, I just don’t need or want the extra cost and complexity.
Last edited by Rick Ferri on Sun Apr 22, 2018 7:57 am, edited 2 times in total.
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Re: I’m still not a fan of international bond funds

Post by longinvest » Sun Apr 22, 2018 7:41 am

Rick Ferri wrote:
Sun Apr 22, 2018 6:37 am
As it was pointed out, the SEC yield on a hedge international bond funds is not the expected total return. These funds use futures and swaps to hedge currency risk. The hedging strategy often produces a much different expected total return than yield alone, and that return is not very predictable. I think this is one of the problems with international bond funds. They are complex investments and not well understood. Personally, I’ll do without them.
It must be noted that the SEC yield and average yield-to-maturity (YTM) of a broad-market bond fund aren't future total return predictions for the fund.

Here's a simple bond fund model (e.g. a brokered CD ladder) which clearly illustrates that YTM doesn't predict its future total returns: A proof that any precise broad bond fund return prediction (e.g. "expect SEC Yield") without an accompanying range or with a tight range is misleading is provided in the second part of the following post:
Last edited by longinvest on Sun Apr 22, 2018 8:00 am, edited 1 time in total.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sun Apr 22, 2018 7:56 am

I agree YTM doesn’t predict *exact* return in a bond portfolio, but it’s pretty darn close at its duration. For example, if a portfolio has a 3% yield and a duration of 5 years, then 5 years from now the annualized return will be very close to 3% assuming all interest is reinvested.

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Re: I’m still not a fan of international bond funds

Post by azanon » Sun Apr 22, 2018 8:04 am

Rick Ferri wrote:
Sat Apr 21, 2018 9:20 am
azanon wrote:
Sat Apr 21, 2018 7:59 am
As a non-financial expert (I'm a biologist), I confess to having them in my portfolio mainly because the 5.x trillion dollar Vanguard recommends that I have them. I admit I am trusting that they are recommending them because they believe them to be in my best interest, and not their own. As a powerhouse investment company, I am also trusting that Vanguard feels no need to succumb to pressure to do so for petty reasons, such as because it's becoming more popular to do so in general.
I'll disagree with you on this one. Vanguard does succumb to the demands of the marketplace. Jack Bogle has spoken about this openly, and I've had the same conversation with several high level executives at the company who confirmed this in confidence.

The fact is, Vanguard offers many funds that investors want although don't necessarily need. International bonds are one example, their new factor funds are another.That being said, Vanguard's view is if investors are going to put there money in these types of products anyway, the least they can do is offer competing products at lower cost.

Rick Ferri
I think you're mixing two different things that Vanguard does. Sure, Vanguard has funds/etfs that the average client doesn't need, and probably a handful that really no one should buy. So that's a little bit of a sin, and perhaps they did that because their customers asked them to do it; There was a demand for those products.

However, that fact should be distinguished from their "official" recommendations that they intend for all investors, or recommendations that are an official position, of sorts. One of those is, for example, to have approximately 40% of your equities in international stock (which, as you know, was increased from previously lower "official" position). And now a second is that a portion of your bonds holdings should be international bonds. The target retirement and lifestrategy series of funds both have international bonds, as an example. Just stated overtly, if you think someone shouldn't hold international bonds, you simply, matter-of-fact, disagree with Vanguard's official position. As someone pointed out earlier, you can't even be served by Vanguard PAS if you're not going to be willing to do that.

And so now coming full circle, you have to decide do you think they do that because they think it's best for their clients, or best for them. Given that they are the financial service that I use, I'm going to hope like heck the former is the truth. Surely Bogle wouldn't even work there if he believed that they were now that compromised. While arguments can be made against holding international bonds, they are not so strong that the only conclusion that one could come to as to why Vanguard is recommending them for all of their investors is for nefarious reasons.
Last edited by azanon on Sun Apr 22, 2018 8:13 am, edited 1 time in total.

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Re: I’m still not a fan of international bond funds

Post by azanon » Sun Apr 22, 2018 8:18 am

Rick I recall seeing your worked with Alex Benke of Betterment a few years back. You do realize that Betterment also uses BNDX in their portfolios? Betterment definitely would have no reason to use BNDX as opposed to just US bonds except for the fact that they believe that it enhances the risk-adjusted return of their portfolios. I guess I'm just saying at least consider getting to a position that many other respected experts are disagreeing with you on what's best for their clients, and that it's not some sort of nefarious thing. Betterment has several articles where they take strong positions against certain types of investments (such as commodities), where the pressure is there to do it, but they resist for one reason; They don't agree that it's best for their clients.

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Re: I’m still not a fan of international bond funds

Post by alamander » Sun Apr 22, 2018 8:33 am

So, I was thinking of rolling over, in the near future, my company profit sharing $ to Vanguard LifeStrategy Conservative Growth Fund (VSCGX). But it is over 18% Vanguard Total International Bond Index Fund Investor Shares right now. This thread is making me rethink this; maybe I can't go for the ultimate in simplicity (one fund) for this $ after all... :(
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sun Apr 22, 2018 8:42 am

This decision makes no difference to the Boglehead philosophy of low-cost, broad diversification, no market speculation.

The decision to include international bonds or not is a strategy decision that each investor makes for themselves.

Do what works for you. Do what maintains discipline.

Philosophy - Strategy - Discipline
These are the elements of a successful life-long portfolio strategy.

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Re: I’m still not a fan of international bond funds

Post by longinvest » Sun Apr 22, 2018 8:54 am

Dear Rick,
Rick Ferri wrote:
Sun Apr 22, 2018 7:56 am
I agree YTM doesn’t predict *exact* return in a bond portfolio, but it’s pretty darn close at its duration. For example, if a portfolio has a 3% yield and a duration of 5 years, then 5 years from now the annualized return will be very close to 3% assuming all interest is reinvested.
Mathematics tell me otherwise.

Here's a complete example of a simple 5-rung brokered-CD ladder:
(... removed example ...)


I moved the details to a previous topic on the subject: How can Bond Funds perform better than yield - 2 examples

In both examples, returns significantly differ from the weighted-average yield-to-maturity (YTM).

I don't call this "close".
Last edited by longinvest on Sun Apr 22, 2018 4:26 pm, edited 4 times in total.
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Re: I’m still not a fan of international bond funds

Post by LadyGeek » Sun Apr 22, 2018 9:02 am

bobcat2 wrote:
Sat Apr 21, 2018 2:39 pm
And here's a quote from the Bogleheads Wiki on emerging market bonds.
In the first edition (2006) of author Rick Ferri's book, All About Asset Allocation, the author included emerging market bonds as a potential portion of a widely diversified taxable bond allocation. The author suggested the following allocation:
Table 4. Fixed Income Allocation (Ferri 2006) Fixed Income Allocation Fixed Income Category

Code: Select all

50% 	Lehman Aggregate Bond Index
20% 	Treasury Inflation-Protected Bonds or I bonds
10% 	High Yield Corporate Bonds
10% 	Emerging Market Debt
Link to Wiki page - https://www.bogleheads.org/wiki/Emerging_market_bonds
...
The wiki quote is missing an important follow-up sentence (I underlined the missing sentence).
In the first edition (2006) of author Rick Ferri's book, All About Asset Allocation, the author included emerging market bonds as a potential portion of a widely diversified taxable bond allocation. The author suggested the following allocation:
Table 4. Fixed Income Allocation (Ferri 2006) Fixed Income Allocation Fixed Income Category

Code: Select all

50% 	Lehman Aggregate Bond Index
20% 	Treasury Inflation-Protected Bonds or I bonds
10% 	High Yield Corporate Bonds
10% 	Emerging Market Debt
In the second edition of ''All About Asset Allocation'' (2010), Ferri no longer includes emerging market bonds in his fixed income allocations, citing the high costs (0.50% to over 1.00%) incurred in implementing emerging market bond portfolios.12
See: Emerging market bonds

Rick - Please provide an update, if one is needed.
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anil686
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Re: I’m still not a fan of international bond funds

Post by anil686 » Sun Apr 22, 2018 9:36 am

While I am not a fan of them, I am a fan of simplicity in a balanced fund buying low and selling high (the opposite of what would make me feel good - buying winners and selling losers). I can deal with the 25% bond allocation to international to help me stay the course and not be my worst enemy with TR and LS funds but if I did it myself - I would not choose to include the asset class...

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Re: I’m still not a fan of international bond funds

Post by michaeljc70 » Sun Apr 22, 2018 9:58 am

nisiprius wrote:
Fri Apr 20, 2018 9:17 pm
I think an interesting question is: how does it benefit Vanguard to offer these funds?
My guess is it gets 4 funds in their Target funds. They charge a slightly higher ER than if you bought the funds separately. If it only had 2/3 funds, most people would just buy the cheaper 2/3 funds themselves and rebalance.

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Re: I’m still not a fan of international bond funds

Post by dphilipps » Sun Apr 22, 2018 10:03 am

I'm considering foreign bonds as a way to diversify away from the US Dollar. Rather than hijack the discussion, I've started a new thread on currency hedging: viewtopic.php?f=1&t=247740&newpost=3893117

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Re: I’m still not a fan of international bond funds

Post by ekoli » Sun Apr 22, 2018 10:35 am

What is your opinion on international bond funds as a EUR-base investor ?

Some of the threads on this forum suggest that given the uncertainty and risk of EURO denominated bonds (maybe except German govt bonds however I think currently the yields are negative) europeans could diversify their bond holdings globally, possibly EUR hedged.

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Re: I’m still not a fan of international bond funds

Post by tibbitts » Sun Apr 22, 2018 10:41 am

michaeljc70 wrote:
Sun Apr 22, 2018 9:58 am
nisiprius wrote:
Fri Apr 20, 2018 9:17 pm
I think an interesting question is: how does it benefit Vanguard to offer these funds?
My guess is it gets 4 funds in their Target funds. They charge a slightly higher ER than if you bought the funds separately. If it only had 2/3 funds, most people would just buy the cheaper 2/3 funds themselves and rebalance.
You are grossly overestimating "most people." Most people who buy target funds have no idea what the individual components are or what "rebalancing" means.

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Re: I’m still not a fan of international bond funds

Post by michaeljc70 » Sun Apr 22, 2018 10:54 am

tibbitts wrote:
Sun Apr 22, 2018 10:41 am
michaeljc70 wrote:
Sun Apr 22, 2018 9:58 am
nisiprius wrote:
Fri Apr 20, 2018 9:17 pm
I think an interesting question is: how does it benefit Vanguard to offer these funds?
My guess is it gets 4 funds in their Target funds. They charge a slightly higher ER than if you bought the funds separately. If it only had 2/3 funds, most people would just buy the cheaper 2/3 funds themselves and rebalance.
You are grossly overestimating "most people." Most people who buy target funds have no idea what the individual components are or what "rebalancing" means.
Fair point. But some people do know and just don't want to bother. Target funds are sometimes defaults in 401k plans or popular choices. Adding another asset class may allow them to justify a few more basis points in the ER. I know they have research on international bonds helping, but you could probably find research to justify adding just about anything.
Last edited by michaeljc70 on Sun Apr 22, 2018 10:57 am, edited 1 time in total.

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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sun Apr 22, 2018 10:57 am

Based on LadyGeek’s request, this was my fixed income allocation in the most recent edition of “All About Asset Allocation”:

60% Total Bond Index
20% TIPS
20% High Yield Corporate

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Re: I’m still not a fan of international bond funds

Post by LadyGeek » Sun Apr 22, 2018 11:49 am

^^^ Thanks, the wiki has been revised: Emerging market bonds, please review.

I removed the 2006 first edition statements from the "Arguments for holding emerging market bond funds", as it is in conflict with later recommendations.

The latest info is now in the "Arguments against holding emerging market bond funds" section.
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Re: I’m still not a fan of international bond funds

Post by cfs » Sun Apr 22, 2018 12:13 pm

Wiki should read 60, 20, 20 vice 60/20/10, please check. Gracias por leer / cfs
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Re: I’m still not a fan of international bond funds

Post by Lauretta » Sun Apr 22, 2018 12:15 pm

LadyGeek wrote:
Sun Apr 22, 2018 11:49 am
^^^ Thanks, the wiki has been revised: Emerging market bonds, please review.

I removed the 2006 first edition statements from the "Arguments for holding emerging market bond funds", as it is in conflict with later recommendations.

The latest info is now in the "Arguments against holding emerging market bond funds" section.
sorry, I've looked up the wiki and under Fixed Income Allocation Table the High Yield bonds are at 10%, so that the numbers don't add up (the total is 90%). Perhaps High Yield bonds should be updated to 20?
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Re: I’m still not a fan of international bond funds

Post by tibbitts » Sun Apr 22, 2018 12:18 pm

michaeljc70 wrote:
Sun Apr 22, 2018 10:54 am
tibbitts wrote:
Sun Apr 22, 2018 10:41 am
michaeljc70 wrote:
Sun Apr 22, 2018 9:58 am
nisiprius wrote:
Fri Apr 20, 2018 9:17 pm
I think an interesting question is: how does it benefit Vanguard to offer these funds?
My guess is it gets 4 funds in their Target funds. They charge a slightly higher ER than if you bought the funds separately. If it only had 2/3 funds, most people would just buy the cheaper 2/3 funds themselves and rebalance.
You are grossly overestimating "most people." Most people who buy target funds have no idea what the individual components are or what "rebalancing" means.
Fair point. But some people do know and just don't want to bother. Target funds are sometimes defaults in 401k plans or popular choices. Adding another asset class may allow them to justify a few more basis points in the ER. I know they have research on international bonds helping, but you could probably find research to justify adding just about anything.
I would say the standard should be whether there is overwhelming evidence against including any publicly-available investment - otherwise they should assume to be part of "the market" and included based on some measure of their market weight. That would certainly be true for all bonds including high-yield, emerging market, TIPS, convertibles, etc.

I do think there can be a case made against treasury securities at market weight if you live somewhere the prevents you from taking advantage of at least the average tax break, since that average is built into the price. The same would hold true for other securities, and I certainly admit to not knowing the full tax implications of every bond type.

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Re: I’m still not a fan of international bond funds

Post by LadyGeek » Sun Apr 22, 2018 12:52 pm

Lauretta wrote:
Sun Apr 22, 2018 12:15 pm
sorry, I've looked up the wiki and under Fixed Income Allocation Table the High Yield bonds are at 10%, so that the numbers don't add up (the total is 90%). Perhaps High Yield bonds should be updated to 20?
cfs wrote:
Sun Apr 22, 2018 12:13 pm
Wiki should read 60, 20, 20 vice 60/20/10, please check. Gracias por leer / cfs
You are both correct, it is my error. I have revised the table. See: Emerging market bonds

También, gracias por leer.
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Re: I’m still not a fan of international bond funds

Post by garlandwhizzer » Sun Apr 22, 2018 1:59 pm

I totally agree with Rick and see no use in adding international bonds to a diversified US bond portfolio. US bonds historically have been if not the safest, certainly among the safest in the world. They are denominated in dollars the currency we spend. Currency exchange increases costs and adds currency volatility to final returns. Since stability is the ultimate goal of bonds in the first place, Vanguard does currency hedging in its international bond funds which further increases costs. Finally the current yield disparity between US bonds and DM bonds at similar risk levels is hugely in favor of US.

Recent good performance of Vanguard's INTL bond funds is strictly due to principal appreciation in a DM falling yield, increasing QE environment. As yields rise in DM (which is expected) that principal appreciation will reverse. At that point it will be strictly up to yields to carry the total return load and DM yields are pathetic. INTL bond principal losses will begin as they have in the US in a rising yield environment. Lower INTL bond yields will compounded these principal losses. The future is not bright for INTL DM bonds IMO.

I tend to agree with Vanguard's advice in most areas but the biggest exception to this is Vanguard's promotion of the "diversification benefits" on international bonds. It seems to me a solution in search of a problem. A 100% US bond portfolio meets my needs just fine.

Garland Whizzer

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Re: I’m still not a fan of international bond funds

Post by lack_ey » Sun Apr 22, 2018 2:08 pm

garlandwhizzer wrote:
Sun Apr 22, 2018 1:59 pm
I totally agree with Rick and see no use in adding international bonds to a diversified US bond portfolio. US bonds historically have been if not the safest, certainly among the safest in the world. They are denominated in dollars the currency we spend. Currency exchange increases costs and adds currency volatility to final returns. Since stability is the ultimate goal of bonds in the first place, Vanguard does currency hedging in its international bond funds which further increases costs. Finally the current yield disparity between US bonds and DM bonds at similar risk levels is hugely in favor of US.

Recent good performance of Vanguard's INTL bond funds is strictly due to principal appreciation in a DM falling yield, increasing QE environment. As yields rise in DM (which is expected) that principal appreciation will reverse. At that point it will be strictly up to yields to carry the total return load and DM yields are pathetic. INTL bond principal losses will begin as they have in the US in a rising yield environment. Lower INTL bond yields will compounded these principal losses. The future is not bright for INTL DM bonds IMO.

I tend to agree with Vanguard's advice in most areas but the biggest exception to this is Vanguard's promotion of the "diversification benefits" on international bonds. It seems to me a solution in search of a problem. A 100% US bond portfolio meets my needs just fine.

Garland Whizzer
But haven't they determined that the cost of currency hedging is something like single digits (or was it low teens) basis points for developed currencies back to USD? I think you're overstating the costs here. That being the effective "spread" they cross to enter into the currency forward contracts.

And there is no huge disparity in yields once you've hedged back the currencies. In fact, in some cases it seems higher in ex-US now that the US yield curve has flattened. [or okay, alternatively, you could formulate this as there being a difference in yields, but then you need to add back in the hedge return as another component on top of local-currency yields] You're not just comparing local-currency yields without hedge return, are you? That would be highly misleading.

I get the argument that developed ex-US yields could rise, but that's a tactical one. US bond yields could rise a lot too. You have to make a case for ex-US yields being more prone to rising more, which is perfectly defensible but I think you'd need to flesh it out more.

I also get the long-term strategic argument about not needing that kind of diversification in fixed income, as sure, equity risk drives the vast majority of risk in most portfolios anyway and diversifying yield curves has some very marginal benefit at best. I would agree with that.

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Re: I’m still not a fan of international bond funds

Post by Valuethinker » Sun Apr 22, 2018 4:02 pm

lack_ey wrote:
Sun Apr 22, 2018 2:08 pm
garlandwhizzer wrote:
Sun Apr 22, 2018 1:59 pm
I totally agree with Rick and see no use in adding international bonds to a diversified US bond portfolio. US bonds historically have been if not the safest, certainly among the safest in the world. They are denominated in dollars the currency we spend. Currency exchange increases costs and adds currency volatility to final returns. Since stability is the ultimate goal of bonds in the first place, Vanguard does currency hedging in its international bond funds which further increases costs. Finally the current yield disparity between US bonds and DM bonds at similar risk levels is hugely in favor of US.

Recent good performance of Vanguard's INTL bond funds is strictly due to principal appreciation in a DM falling yield, increasing QE environment. As yields rise in DM (which is expected) that principal appreciation will reverse. At that point it will be strictly up to yields to carry the total return load and DM yields are pathetic. INTL bond principal losses will begin as they have in the US in a rising yield environment. Lower INTL bond yields will compounded these principal losses. The future is not bright for INTL DM bonds IMO.

I tend to agree with Vanguard's advice in most areas but the biggest exception to this is Vanguard's promotion of the "diversification benefits" on international bonds. It seems to me a solution in search of a problem. A 100% US bond portfolio meets my needs just fine.

Garland Whizzer
But haven't they determined that the cost of currency hedging is something like single digits (or was it low teens) basis points for developed currencies back to USD? I think you're overstating the costs here. That being the effective "spread" they cross to enter into the currency forward contracts.

And there is no huge disparity in yields once you've hedged back the currencies. In fact, in some cases it seems higher in ex-US now that the US yield curve has flattened. [or okay, alternatively, you could formulate this as there being a difference in yields, but then you need to add back in the hedge return as another component on top of local-currency yields] You're not just comparing local-currency yields without hedge return, are you? That would be highly misleading.
Isn't it also credit risk? Buying the Bund (German for 3rd party readers) is equivalent to buying the UST. Buying the Italian government bond (the largest bond market in Europe) is most assuredly not-- as the difference in yield of something over 100 basis points v. the German tells you.
I get the argument that developed ex-US yields could rise, but that's a tactical one. US bond yields could rise a lot too. You have to make a case for ex-US yields being more prone to rising more, which is perfectly defensible but I think you'd need to flesh it out more.
The Central Banks are definitely in a different price re unwinding Quantitative Easing, and re interest rate rises. In fact if you saw this week the pound was down after Carney (governor) said that interest rates might not be raised again in a hurry..
I also get the long-term strategic argument about not needing that kind of diversification in fixed income, as sure, equity risk drives the vast majority of risk in most portfolios anyway and diversifying yield curves has some very marginal benefit at best. I would agree with that.
It certainly does right now, when interest rate cycles are so aligned.

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Re: I’m still not a fan of international bond funds

Post by asset_chaos » Sun Apr 22, 2018 4:27 pm

Vanguard must have anticipated this thread because they've produced a report
https://personal.vanguard.com/pdf/ISGGLBD.pdf dated April 2018 to add their two cents.

Going global with bonds: The benefits of a more global fixed income allocation

■ An allocation to global bond markets gives investors exposure to a greater number of
securities, markets, and economic and inflation environments than they would have with
a portfolio composed purely of local market fixed income. In theory, this diversification
can help reduce a portfolio’s volatility without necessarily decreasing its total return.

■ We tested the empirical reality across five markets: the United States, Canada, the
United Kingdom, the euro area, and Australia. In each market, reality confirms theory—
but with a critical qualifier: The key to realizing the diversification potential of global
bonds is to hedge the currency exposure back to the investor’s local currency.

■ Although the benefits of global bond diversification are clear, the optimal strategic
allocation depends on investor-specific factors such as the desire to mitigate risk, the
cost of implementation, and liability management objectives. We explore how these
factors influence the size of an investment in hedged global bonds.
Regards, | | Guy

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Re: I’m still not a fan of international bond funds

Post by lack_ey » Sun Apr 22, 2018 4:33 pm

Valuethinker wrote:
Sun Apr 22, 2018 4:02 pm
Isn't it also credit risk? Buying the Bund (German for 3rd party readers) is equivalent to buying the UST. Buying the Italian government bond (the largest bond market in Europe) is most assuredly not-- as the difference in yield of something over 100 basis points v. the German tells you.
There could be some additional yield from credit risk but it's not in what I was referencing.

As I calculated earlier, the 10-year German bund yield plus the current hedge return is (was? have not updated) greater than the 10-year UST yield by a little bit.
viewtopic.php?f=10&t=247644#p3891191

That's not about credit risk.

Hedge return of course will vary over time, may average a lower figure (or could be even higher) over the next 10 years. My question was if you had an estimate of this and accounted for it.

There can be some modest deviances based on supply/demand of some issues or currencies or forwards. Hedging a bund back to USD doesn't make it exactly like a UST. Especially not if you're rolling 1-mo forwards like the currency-hedged bond funds do.

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Re: I’m still not a fan of international bond funds

Post by longinvest » Sun Apr 22, 2018 5:00 pm

Let's try to get Portfolio Visualizer to the rescue.

In 2014, Vanguard Canada introduced the U.S. Aggregate Bond Index (CAD-hedged) ETF (VBU), a wrapper around the U.S.-based Vanguard Total Bond Market ETF (BND).

Vanguard Canada's argument in favor of VBU is its diversification benefit relative to an investment into canadian bonds. A good proxy for canadian nominal bonds is Vanguard Canada's Canadian Aggregate Bond Index ETF (VAB).

Here's a comparison between Portfolio 1 - BND (US$), Portfolio 2 - VBU (CDN$), and Portfolio 3 - VAB (CDN$) from August 2014 to March 2018.

Source: Portfolio Visualizer

Image

Image

Here's the evolution of the CAD/USD exchange rate over that period.

Source: XE Currency Charts

Image

Does this lead to any conclusions about currency-hedged foreign bonds?
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Re: I’m still not a fan of international bond funds

Post by longinvest » Sun Apr 22, 2018 5:18 pm

Here's my take.

None of what I've read so far, in the current topic, had prepared me to this outcome. I don't see US bonds magically transformed into Canadian bonds. I don't see a magical hedge return. And, I do see a mostly-unfavorable tracking error between VBU and BND.

Markets don't care about opinions. :!:

Past performance is no guarantee of future performance.
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